United States v. Dombrowski

United States District Court, N.D. Illinois, Eastern Division

July 15, 2014

UNITED STATES OF AMERICA,v.STEVEN DOMBROWSKI.

OPINION AND ORDER

SARA L. ELLIS, District Judge.

The Government has charged the Defendant, Steven Dombrowski, with insider trading in violation of 17 C.F.R. § 240.10b-5, which was promulgated under § 10(b) of the Securities Exchange Act of 1934, codified as 15 U.S.C. § 78a et seq. The sixteen count Indictment alleges that Dombrowski misappropriated for his own benefit material nonpublic information that he obtained by way of his position as the Director of Audit for Allscripts Healthcare Solutions, Inc. ("Allscripts"). Now before the Court is Dombrowski's motion to dismiss the Indictment pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B). Dombrowski contends that the Indictment does not adequately allege the elements of the offense because it charges him with trading Allscript securities merely while in possession of material nonpublic information. Dombrowski asserts that the Government must instead allege and prove that his trades were motivated by this inside information. The Court finds that the Indictment adequately alleges a violation of the Securities Exchange Act, and therefore, the Court denies Dombrowki's motion to dismiss [17].

BACKGROUND

Dombrowski served as Director of Audit at Allscripts. Allscripts' common stock is traded on the NASDAQ stock market under the symbol MDRX. Allscripts publicly discloses information about its expenses, sales, revenues, and earnings on a quarterly basis. On April 26, 2012, Allscripts announced that its financial performance during the first quarter of 2012 was worse than the market had anticipated, causing Allscripts' stock price to decline. The Indictment alleges that as Director of Audit, Dombrowski learned of material information about Allscripts' financial performance before Allscripts announced the information to the public.

The Government alleges that Dombrowski controlled a trading account that was held in his wife's maiden name. The Indictment further alleges that in April of 2012, before Allscripts announced its first quarter earnings, Dombrowski used this trading account to short-sell 1, 000 shares of Allscripts stock and to purchase put options[1] in Allscripts stock on eleven different occasions. Once Allscripts announced its first quarter 2012 earnings and its stock price fell, Dombrowski allegedly purchased 1, 000 shares of Allscripts stock, offsetting the short sale, and sold the put options that he had purchased earlier in the month. The Government alleges that these transactions netted Dombrowski a profit of approximately $286, 211.

LEGAL STANDARD

Federal Rule of Criminal Procedure 12(b)(3)(B) provides that a criminal defendant may, prior to trial, move to dismiss an indictment or information as defective. In determining whether an indictment is defective, courts first look to the Sixth Amendment to the Constitution, which sets out that criminal defendants "shall enjoy... the right to be informed of the nature and cause of the accusation." U.S. Const. amend. VI. Additionally, Federal Rule of Criminal Procedure 7(c)(1) states that an indictment or information must include "a plain, concise, and definite written statement of the essential facts constituting the offense charged." Fed. R. Crim. P. 7(c)(1).

"An indictment is constitutionally sufficient and satisfies Fed. R. Crim. P. 7(c)(1) if it states the elements of the crime charged, informs the defendant of the nature of the charge so she may prepare a defense, and enables the defendant to plead the judgment as a bar against future prosecutions for the same offense." United States v. Agostino, 132 F.3d 1183, 1189 (7th Cir. 1997) (citing Hamling v. United States, 418 U.S. 87, 117, 94 S.Ct. 2887, 41 L.Ed.2d 590 (1974)). The Supreme Court has long held and recently confirmed that "[a]n indictment returned by a legally constituted and unbiased grand jury, like an information drawn by the prosecutor, if valid on its face, is enough to call for trial of the charge on the merits." Costello v. United States, 350 U.S. 359, 363, 76 S.Ct. 406, 100 L.Ed. 397 (1956); see also Kaley v. United States, ___ U.S. ___, 134 S.Ct. 1090, 1097, 188 L.Ed.2d 46 (2014). A motion to dismiss an indictment does not challenge the strength of the Government's case or the sufficiency of the evidence. United States v. Moore, 563 F.3d 583, 586 (7th Cir. 2009). Rather, when ruling on a motion to dismiss, the Court must determine "whether it's possible to view the conduct alleged" as constituting the crime charged. Id. "Indictments are reviewed on a practical basis and in their entirety, rather than in a hypertechnical manner." United States v. Smith, 230 F.3d 300, 305 (7th Cir. 2000) (citation omitted) (internal quotation marks omitted).

ANALYSIS

Dombrowski moves to dismiss the Indictment as defective on the basis that it charges him only with trading while possessing inside information regarding Allscripts' financial results. He argues that instead the Indictment must allege that he used this information or that the information caused him to trade as he did. In support of this argument, Dombrowski cites cases that discuss the standard of proof that the Government must satisfy at trial. See United States v. O'Hagan, 521 U.S. 642, 652, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997); S.E.C. v. Lipson, 278 F.3d 656, 670 (7th Cir. 2002); United States v. Anderson, 533 F.3d 623, 630 (8th Cir. 2008); United States v. Smith, 155 F.3d 1051, 1066 (9th Cir. 1998); S.E.C. v. Adler, 137 F.3d 1325, 1337 (11th Cir. 1998). These cases support the proposition that, in order to convict a defendant of insider trading, the Government must prove that the defendant traded on the basis of inside information. However, none of these cases stands for the proposition that an insider trading indictment must explicitly allege that a defendant used inside information in order to satisfy the requirements of the Constitution or the Federal Rules of Criminal Procedure. In fact, Dombrowski does not cite any relevant authority outlining the Government's burden in drafting the Indictment.[2]

Rule 10b-5 provides:

It shall be unlawful for any person... by the use of any means or instrumentality of interstate commerce... or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud,

...

in connection with the purchase or sale of ...

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